The World’s Next Big Trading Block May Be India

May 6, 20151,132 Views

A new Common Market is being formed. It has a bigger economy than the whole of sub-Saharan Africa, more states than the European Union has members, and twice the population of North America. It’s called India.

For more than six decades since independence, India’s 29 states have operated almost as separate countries. They set their own taxes, charged import duties on goods from neighboring states, had their own politics, culture and even languages.

Prime Minister Narendra Modi is trying to change that, using his popularity among voters to replace more than a dozen levies with a single goods-and-services tax by next April, leaning on state governments to amend labyrinthine labor and land laws, and revamping the Soviet-style Planning Commission. To win support from states, he’s pledged them a record share of federal tax revenue.

“There are 29 mini Indias within one big India and they are modifying their approval process, procedures to make themselves competitive,” said Ajay S. Shriram, 61, chairman and senior managing director of DCM Shriram Ltd., a business with interests in sugar, chemicals and cement that has plants and offices in at least five states. “States are trying for their own economic development, which will help improve the ease of doing business and boost the country’s growth.”

The new commercial competition is beginning to show. Ask Vineet Mittal, vice chairman of solar-power company Welspun Renewables. Five years ago, he tried to get permission to build a solar power plant in a southern Indian state. After six months of waiting for appointments with officials and being given the run around by government bureaucrats, he gave up.

Second Attempt
Last October, he tried again. When he arrived at the airport, he was surprised to find liaising government officers waiting for him. They whisked him straight to meet senior bureaucrats and the chief minister of the state. By March, Welspun was ready to start work on a 7.5 billion rupee ($118 million), 100 megawatt project, 20 times the size of the one he tried to propose in 2010.

“In the past, officials enjoyed making you wait, there was a level of sadism,” Mittal said in an interview in his New Delhi office. “There is drastic change in attitude and culture to attract industries.” Given the size of India’s states and a predicted growth rate of at least 7.5 percent over the next five years, the potential benefits of integration for investors are huge.

In population terms, Uttar Pradesh is equivalent to Brazil, Maharashtra would be Mexico, while Bihar is on par with the Philippines. Telangana, India’s 12th-largest state, is comparable to Canada. “India’s states can be compared to major countries around the world,” McKinsey analysts including Jaidit Brar wrote in a report in October. “Understanding their evolution and making the right bets from a five- to 10-year standpoint is critical to being well positioned for growth in the Indian market.”

Poor Winners
Should Modi succeed in forging a single market, the biggest winners could be some of the poorest states. Like the boom for EU newcomers from Central Europe in 2004, growth in laggard states may consistently outpace the national average as India’s lopsided economy begins to balance out. Eight Indian states accounted for about 45 percent of the $1.8 trillion gross domestic product in 2012, led by Haryana and Maharashtra, the McKinsey report said.

“For India to grow at 9-10 percent, many states of India have to grow at 15-16 percent,” Amitabh Kant, secretary in the Department of Industrial policy & Promotion, said in a March interview. “That’s easily do-able because there are very low levels of growth.” India has forecast growth of as much as 8.5 percent in the year ending March 2016, which would be the fastest among major economies.

Achieving those levels of expansion will require states to adopt supportive policies, the McKinsey authors said. That still means a political battle for Modi, whose Bharatiya Janata Party and its allies control 11 states, while the main opposition Congress party-led bloc holds nine, with the rest run by regional parties that include Communists and groups opposing Modi’s policies.

Political Color
“The political color of each Indian state has a significant impact upon their relations with the Indian federal government,” Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight, said from Singapore. “States also need to realize that they are not just competing amongst each other, but also face global competition.”

The infighting, corruption and endless regulations have tarnished the country’s image for investors. India fell to 71st from 60th among 144 nations in the World Economic Forum’s Global Competitiveness Index 2014/15, behind Rwanda and Romania. On the World Bank’s latest Ease of Doing Business Index, India’s position worsened to 142nd out of 189.

Modi has directed his administration to improve India’s ranking, but many of the measurement parameters — registering a business, getting electricity, paying taxes, enforcing contracts — rest with the states. India’s states have 22 official languages, excluding English, some of which have their own script. In the 28-member EU, where goods and people are free to travel across borders, over half the population speaks English, while most of the rest speak at least one of the other three main languages.

It’s easier to drive from France to Germany than it is from Delhi to the Taj Mahal because of the need to stop and pay a road levy when you cross a state border. Even with those handicaps, Modi is having some success. The lower house of parliament on Wednesday approved a bill that’ll allow him to work toward implementing a national sales tax and the state of Rajasthan used constitutional powers to amend local laws and make it easier for companies to access land and hire and fire workers. Madhya Pradesh is also relaxing its labor laws.

Intense Competition
“We’re trying our best to attract investment by facilitating land, providing incentives and other facilities,” said Apurva Chandra, principal secretary for industries in the western state of Maharashtra, which houses the financial hub Mumbai. “Ultimately this intense competition among states is helping them as well as the country.”

Maharashtra is working to reduce the number of permits needed to set up a business to about 30 from 70, he said. It now takes 30 days to register a company in Mumbai, compared with an average 9.2 days in developed nations, World Bank data show. Maharashtra is the most competitive among innovation-driven Indian states, followed by Gujarat, which Modi governed for more than a decade, according to the Institute for Competitiveness, part of the network of the Institute for Strategy and Competitiveness at Harvard Business School.

Maharashtra has attracted 30 percent of India’s foreign direct investment since 2000 and Gujarat has lured 4 percent. All states will have to follow their example if India’s to benefit, said Welspun Renewables’ Mittal. “If this culture is started by every state, then it’s a game changer,” he said.